Chinas Rural Finance Reform

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Chinas Rural Finance Reform

• Jiang Liming
• Deputy Director General
• Cooperative Finance Supervision Department
• China Banking Regulatory Commission
• May 22, 2008
• Dallas, Texas

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Contents

• Introduction
• 1.Reform of Rural Credit Unions (RCUs)
• 2.Policy Innovation Concerning the Market Entry
  of Rural Financial Institutions
• 3.Agricultural Development Bank and the Evolution
  of Its Functions
• 4.Breakthrough on Postal Savings Institutions
  Reform
• 5.The Restructuring of the Agricultural Bank of
  China
• 6.Differentiated Supervision of Rural Financial
  Institutions
• 7. Challenges Facing the Reform of Rural Finance

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Introduction

• China is a developing agricultural country with a
  population of 1.3 billion. The three
  agricultural issues (namely, agriculture,
  countryside, and peasant) is one of the most
  essential issues for the government
• The government has always been attaching great
  importance to the development of three
  agricultural issues and the reform of rural
  finance
• Ever since China's opening-up, the government has
  been taking constant efforts in rural finance
  reform, improving the service system in rural
  areas and strengthening the supervision to rural
  finance intuitions through a series of strategic
  arrangements and policy measures

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Introduction

• Policy bank
• Agricultural Development Bank(ADB)
• Commercial banks
• Agricultural Bank of China(ABC)
• Postal Savings Bank (PSB)
• Rural cooperative financial institutions
• Rural Credit Unions (RCUs)
• Rural Commercial Banks
• Rural Cooperative Banks
• New types of rural financial institutions
• Township and Village Banks (TVBs)
• Rural Loan Companies (RLCs)
• Rural Mutual Cooperatives (RMCs)

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Introduction

• As of the end 2007
• The total assets of the above institutions
  amounted to RMB 14.7 trillion, 27.6 of total
  banking assets
• Debts RMB 14.2 trillion, 28.4 of total banking
  debts
• Deposits RMB 11.9 trillion, 29.5 of the total
  banking deposits
• Loans RMB 7.9 trillion, 27.6 of the total
  banking loan
• The total loan outstanding related to agriculture
  has reached RMB 6.09 trillion, of which direct
  agricultural loan amounted to RMB 1.57 trillion
• The proportion of household that have access to
  banking loan reached 33, from which more than
  300 million farmers benefited

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1.Reform of Rural Credit Unions (RCUs)
The history of rural credit unions can be traced
back to more than 5 decades ago
At beginning
Cooperative financial institutions providing
services to their cooperative members on the
basis of mutual assistance
cooperative institutions ? stock corporation
institutions or joint stock institutions
Recent years
Some of them have been restructured into rural
commercial banks or rural cooperative banks
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1.Reform of Rural Credit Unions (RCUs)

• RCUs have been playing an active role in
  supporting farmers and rural enterprises
• Largest network
• 8509 RCUs legal entities with 70,000 branches.
• Extensive clients base
• 78 million farmer customers
• Take the leads among all rural financial
  institutions measured by agricultural loan and
  rural household loan granted
• deposit balance RMB 3.2 trillion, loan
  outstanding RMB 1.4 trillion and household loan
  RMB 1.2 trillion

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1.Reform of Rural Credit Unions (RCUs)
Since 2003, the CBRC has launched RCUs reform on
a pilot basis
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2. Policy Innovation Concerning Market Entry of
Rural Financial Institutions

• At the end of 2006, the CBRC relaxed market entry
  threshold for banking institutions in rural areas
  
• Two Liberalizations
• Capital liberalization Various types of social
  capital, including non-government capital and
  foreign capital are welcomed to participate in
  rural finance
• Institutional liberalization Investors are
  allowed to set up new types of rural financial
  institutions such as township and village banks,
  loan companies, and rural mutual cooperatives.
  And commercial banks and rural cooperative banks
  are encouraged to establish branches in rural
  areas

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2. Policy Innovation Cocnerning Market Entry of
Rural Financial Institutions

• "Lowering market entry threshold, while
  strengthening prudential supervision"
• Lower the market entry threshold Relax market
  entry restrictions on institutions and business
  scopes, increasing the coverage of financial
  institutions in rural areas
• Lower requirement on registered capital. Minimum
  capital--
• Township and village banks RMB 1 million
• Loan companies RMB 500,000
• Rural Mutual Cooperatives RMB 100,000
• The minimum registered capital for rural
  cooperative banks is reduced from 20 million to
  10 million, and rural credit unions from 10
  million to 5 million
• Quantity and proportional restriction for rural
  financial institutions to set up braches in
  counties, towns and villages are lifted up
• Lower requirements on the qualification of
  investors and the the investment cap for domestic
  investors
• Revise authorization rights for newly established
  legal entities or branches

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2. Policy Innovation Concerning Market Entry of
Rural Financial Institutions

• Strengthening prudential supervision
  strengthening the enforcement of supervision
  measures, and an enforceable market exit
  mechanism in place
• Newly established banking legal entities should
  classify their assets in line with prudential
  requirements
• Capital Adequacy Ratio should be no less than 8
• Provisioning Coverage Ratio should be no less
  than 100
• Prudential requirements on internal control,
  asset concentration and liquidity should be
  satisfied

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2. Policy Innovation Concerning Market Entry of
Rural Financial Institutions

• Since Oct. 2007, the pilot reform has been
  expanded from the original 6 provinces to 31
  nationwide
• 38 new types of rural financial institutions have
  obtained licenses, among which 25 are township
  and village banks, 4 are loan companies and 9 are
  rural mutual cooperatives.
• CitiBank, HSBC and Grameen Trust are actively
  involved in the pilot reform either by direct
  investment or by providing technical supports
• The total capital drawn from various sources
  amount to RMB 530 million, with 840 million in
  deposit and 450 million in loan

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3.Agricultural Development Bank and the Evolution
of Its Functions

• The ADB was founded in 1994. Originally, it was a
  specialized policy bank providing funds for the
  government to purchase grain, cotton, and edible
  oil in rural areas
• The business scope of the ADB have extended
  greatly in recent years. Now it not only
  provides loans for agriculture, forestry, animal
  husbandry, sideline production and fishery
  production, but also for agricultural processing
  industry and technological agriculture industry
• At present, the ADB network covers 2174 branches
  nationwide, with deposit balance RMB 107.0
  billion, and loan outstanding more than RMB 1
  trillion. Its total assets amount to RMB 1.1
  trillion

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4.Breakthrough on Postal Savings Institutions
Reform

• A nationwide postal saving system was established
  in 1986 when postal institutions started taking
  deposit. Deposits taken were all submitted to the
  PBoC
• In 2004,the deposit-taking business and postal
  business of postal institutions are separated
  from each other. And deposits were divided into
  two categories deposits taken before the reform
  would remain in the PBoC account, while the new
  deposits would be kept in each institution's own
  account for use
• In 2007, postal savings institutions were
  officially changed into Postal Savings Bank to
  further enhance its function in serving
  agriculture
• Till the end of 2007, the branches of the Postal
  Savings Bank had exceed 37,000, deposit balance
  RMB 1.7 trillion, loan outstanding RMB 113.4
  billion, and total assets exceeding RMB 900
  billion

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5. Restructuring of the Agricultural Bank of
China

• The ABC is a large rural commercial bank in China
• It was initially designed to provide specialized
  agriculture-support loan and long-term
  agricultural loan. In the course of its
  commercialization, the ABC has expanded its
  business network to both cities and villages,
  providing comprehensive services for its clients
• By the end of 2007, the ABC owned a network of
  27,000 branches, deposit balance RMB 5.3
  trillion, loan outstanding RMB 3.5 trillion, and
  total assets RMB 6.1 trillion
• The government is pushing forward the ABC reform
  steadily in line with "serving three agricultural
  issues, overall restructuring, commercial
  operation, and going public", and has achieved
  plausible progress. Particularlyon the issue of
  a proper relationship between commercialized
  operation and the needs to serve agriculture of
  the ABC

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6.Differentiated Supervision of Rural Financial
Institutions

• While applying uniform supervisory criteria to
  all institutions in terms of loan classification,
  capital adequacy, and risk management
  supervision, the CBRC also takes fully
  consideration of the differences between each
  institution and applies different policies
  accordingly
• Different supervisors are designated for
  different legal entities
• Different supervision policies are applied to
  institutions with different features
• Different supervision measures are given to
  institutions with different supervisory ratings

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6.Differentiated Supervision of Rural Financial
Institutions

• The CBRC offer active window guidance on how to
  best support the development of agriculture,
  encouraging financial institutions to develop
  collateral free credit facilities such as micro
  credit and cross-guaranteed credit
• the CBRC has been steadily enhancing the coverage
  ratio and business scope of micro credit through
  financial innovation
• The qualified to lender of the micro credit from
  rural credit unions to all banking institutions
• Qualified industries for micro credit from
  planting and breeding industry to all
  agricultural related businesses
• The line of credit from 3000-5000 RMB to
  10,000-3 million RMB
• Credit duration from within one year to 1-3
  years
• Interest rates from only fixed rates to both
  fixed and floating rates
• Micro-credit business plays a positive role in
  increasing peasants revenue and production

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7.Challenges Facing the reform of Rural Finance

• Further improve the rural financial system
• Enlarge the business scope of the policy bank,
  and improve its role in providing credit in areas
  that commercial banks would usually be unable or
  reluctant to service
• Strengthen the social responsibility of large
  commercial banks, and enhance their service by
  virtue of their vast network
• Further reform rural financial cooperative
  institutions' management, ownership structure,
  and corporate governance, realizing its central
  role in supporting agriculture
• Accelerate the development of new types of rural
  financial institutions, and enlarge their
  financial networks in less developed areas and
  insufficient competition regions

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7.Challenges Facing the Reform of Rural Finance

• Strengthen the institutional system of rural
  finance
• The matter of collaterals Expand the scope of
  qualified collaterals and study the feasibility
  of new types of collaterals such as orders, bills
  of lading, and account receivable to tackle the
  issues of the absence of collaterals and increase
  accessibility for loan in rural areas
• The problem of insurance Accelerate the building
  up of a rural insurance system. Expand the scope
  and amount of the subsidies for commercial
  agricultural insurance
• The issue of interest rates Continue the reform
  on the liberalization of interest rate system,
  allowing financial institutions to set their own
  rates in line with the credit condition of their
  clients and prospective income

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7.Challenges Facing the Reform of Rural Finance

• Construct a better rural finance policy
  supporting environment
• Discount policy for agriculture loan
• favorable tax policies
• favorable monetary policies

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Thank you!